CRA Performance and Purchased Loans

Inquiry/Issue

The Bank is a small bank for CRA purposes. In 2012, it purchased a number of loans located outside of its assessment area. The result is that its lending performance has been “skewed.” Must it consider these loans in evaluating its CRA performance? Can it omit the loans purchased in 2012 as an anomaly, or would it have to do so for all purchased loans?

Response Summary

Both originated and purchased loans are considered under the small bank lending test. Purchased loans may enhance the Bank’s loan-to-deposit ratio, which is one component of the test, while diminishing the proportion of loans made within its present assessment area, which is another component of the test. In addressing this latter aspect, the Bank would do so within its overall performance. It may also consider adjusting its assessment area to accommodate the purchased loans, if these are a substantial portion of its loan portfolio and would strengthen its CRA performance.

Response Detail

Under Regulation BB, a small bank’s lending performance is evaluated under the following criteria:

• Loan-to-deposit ratio
• Percentage of loans located in the financial institution’s assessment area
• Record of lending to borrowers of different income levels and businesses and farms of different sizes
• Geographic distribution of loans
• Record of taking action to written complaints about its performance in helping to meet credit needs in its assessment area. 12 CFR §228.26(b).

Under the small bank lending test, examiners will consider both originated and purchased loans. A small financial institution’s loan-to-deposit ratio is calculated in the same manner that the Uniform Bank Performance Report (“UBPR”) determines the ratio: by dividing the institution’s net loans and leases by its total deposits. The ratio is found in the Liquidity and Investment Portfolio section of the UBPR. Examiners will use this ratio to calculate an average since the last examination by adding the quarterly loan-to-deposit ratios and dividing the total by the number of quarters. Interagency Questions and Answers Regarding Community Reinvestment (“Questions and Answers”), §___.26(b)(1) – A1; (b)(4) – A4.

Assuming that the Bank has purchased loans, and not an interest in a pool of loans, such loans will be reflected in the loan-to-deposit ratio to the extent that they are included in the net loans and leases of the Bank. In this respect, purchased loans enhance the Bank’s performance by increasing the proportion of loans to deposits.

Small bank performance standards under Regulation BB, however, also consider the percentage of loans and, as appropriate, other lending-related activities located in the financial institution’s assessment area. 12 CFR §228.26(b)(2). If the purchased loans are outside the Bank’s present assessment area, the proportion of loans made within that assessment area will be diminished.

Regulation BB does not provide for the omission of purchased loans, nor is any reference made in the Questions and Answers of this practice. For example, financial institutions required to collect data on small business and farm loans must include in such data both loans originated and purchased. 12 CFR §228.42(a).

This does not necessarily mean that the Bank will not receive a “satisfactory rating,” if it failed to make a majority of its loans in its assessment area. It would fail to meet the standards for satisfactory performance only under this criterion. The effect on the overall performance rating of a financial institution, however, is considered in light of the performance context, including information regarding economic conditions; loan demand; the institution’s size, financial condition, business strategies, and branching network; and other aspects of the institution’s lending record. Questions and Answers Regarding, §___.26(b)(2) – A1.

In addressing the effect of purchased loans on its lending performance, the Bank would do so within its overall performance. It might also consider adjusting its assessment area. Under Regulation BB, a bank’s assessment area must include geographies in which it has its main office, branches and deposit-taking ATMs, as well as the surrounding geographies in which it originated or purchased a substantial portion of its loans. 12 CFR §228.41(c). This means that the Bank is not only limited to its brick and mortar offices in determining its assessment area, but is also limited to where it originated or purchased the loans in its portfolio. If the purchased loans outside its present assessment area are substantial, it should consider whether the assessment area should be increased to accommodate them.

In making this decision, the Bank should consider the nature of the loans and their location, such as whether they are to low to moderate-income borrowers or in low to moderate-income geographies. It should also consider other loans in the same area originated by the Bank. The inclusion of loans to low to moderate-income borrowers through an expanded assessment area would strengthen the Bank’s CRA performance.

This entry was posted on Tuesday, May 26th, 2015 at 3:00 pm.